From Texas, I mostly cover the energy industry and the tycoons who control it. I joined Forbes in 1999 and moved from New York to Houston in 2004. The subjects of my Forbes cover stories have included T. Boone Pickens, Harold Hamm, Aubrey McClendon, Michael Dell, Ross Perot, Exxon, Chevron, Saudi Aramco and more. Follow me on twitter @chrishelman.

Senator Jeff Sessions of Alabama has opened up an investigation into the financing practices of solar developers like SolarCitySolarCity. The concern: that solar companies may have been inflating the value of their solar installations. Why? In order to siphon more cash out of taxpayers’ pockets via federal grants and tax credits.

The most generous subsidy program, managed by the Treasury Department reimburses investors in renewable energy systems (like solar) a remarkable 30% of their purchase price — in cash. Alternatively, solar investors can elect to receive tax credits equal to 30% of that price. The Treasury Department has dished out more than $18 billion in cash grants to renewable energy developers under Section 1603 of the American Recovery and Reinvestment Act of 2009. More than $4.3 billion of that has gone to solar projects.

This encourages potential abuse of taxpayer funds, since the higher the prices that solar developers report to Treasury, the more cash they can rake in.

The cash doesn’t just flow to solar installers. Those companies, including SolarCity, are unprofitable and rely on the likes of U.S. Bancorp and GoogleGoogle to fund their solar buildouts. If those partners are putting up the capital, you can be sure they are the ones enjoying the profits — at taxpayer expense.

It’s not enough to just get free money from the government. If pending investigations find that developers are systematically inflating the prices of their solar systems (by what several solar industry executives insist is more than 15% on average), the installers and their backers will have hundreds of millions of dollars in unjustified cash payouts and tax credits.

Considering that the Treasury’s Section 1603 program still has some $10 billion in grants available to dole out in the years to come, this is an issue that needs to be examined and resolved.

***

SolarCity has long been suspected of inflating the “fair market value” of its solar installations significantly above actual installation costs. Even before its IPO late last year, SolarCity disclosed that it was being investigated by the Treasury department for the practice. Sungevity and SunRun were also subpoenaed by the Treasury last year.

But SolarCity has been the focal point of investigation so far because of its skyrocketing market valuation (up 350% in the past year), leading market share, and its connection to high profile billionaire Elon Musk, who owns 21 million SolarCity shares, worth about $1 billion. Musk is even starting to supply SolarCity with battery backup systems designed at his Tesla electric automaker.

There have been numerous reports on suspect practices over the past two years, but the issue began to snowball this summer. In July the Arizona Republic showed how SolarCity’s average costs per watt in Arizona were perennially about 19% higher than its competitors. In August, Barrons published the expose “Dark Clouds Over SolarCity.” That prompted Sen. Sessions to launch an investigation, and send a letter to Treasury Sec. Jack Lew demanding answers to a laundry list of questions. Wrote Sessions: “In simple terms, there is concern that SolarCity might become the next Solyndra — a company propped on the back of the taxpayers, not the product produced.”

SolarCity, in November, published this rebuttal to the Barrons article, which is well worth reading. Entitled “Burying A Dead Horse,” it seeks to put the issue to rest, explaining that its independent appraisers use the same valuation methods as everyone else in the industry:

The issue in the inquiry is the fair market value of solar assets. We are absolutely certain that we have followed the 1603 Program’s rules and guidance. As we explained above, in applying for Section 1603 grants, we have relied on independent appraisers using well established IRS guidelines, and all of our projects were valued at or below the guidance that Treasury itself had published for the industry beginning in June 2011.

And yet the company and its investors have been at loggerheads with officials in the Treasury Department over what this fair market value should be. SolarCity has said in its filings that Treasury has balked at forking over millions of dollars in grant money that the company thinks it and its investors are entitled to.

SolarCity explains that its claimed fair market values are not necessarily higher than those of its peers or competitors:

“SolarCity is unusual in that it finances, develops and installs the majority of its solar projects. Most of SolarCity’s competitors in the lease and power purchase agreement category don’t build the systems themselves, but rather acquire them from third-party contractors. When SolarCity’s competitors report for the project database, they report the amount they paid the third-party contractor. That is a lower number than the price they sell the system for, but the price is the value the grant or tax credit is based on. In short, Barron’s mistakenly assumed that the system costs reported in published databases like CSI are the same as the fair market values that Section 1603 applicants are allowed to claim. They are not. This misinterpretation contributed to a flawed analysis that appeared to show a much greater difference in price (and by implication, grant or tax credit) than actually exists.”

So in other words, SolarCity’s reported prices (averaging around $6 per watt) naturally should be higher than its peers (about $4 per watt) because what SolarCity is reporting is the price it gets from selling solar systems to the investment funds that it co-sponsors, not its own installation costs. Got it?

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Here are some facts from the trenches for comparison. We’ve been selling PV systems for over 16 years to a nationwide clientele. Our grid tie solar system pricing runs from less that $2.90 a watt installed for our standard performance, name brand systems and less than $3.40 per watt installed that uses Hyper X, high performance solar modules that offers a better PTC to STC ratio than over 100 of SunPower’s solar modules.

These same, less than $3.40 per watt high performance systems also offer higher performance inverters with power optimizers for each solar module that provides higher performance and more features than the string inverters used in SunPower’s current systems.

Both of these prices are before any incentives are applied. At these pricing levels, we are making plenty of profit. So pricing a system at more than $5.00 a watt, in my opinion, is simply obscene.

The government and financial communities are finally catching on to the practices of many large leasing companies — who have significantly over valued installation prices to maximize their taxpayer funded investment tax credit, equal to 30% of the stated installation value.

While leasing solar is a good option for some homeowners, we have long believed that homeowners in NJ are better off owning their solar panel systems — rather than leasing them…

Homeowners who own their systems are eligible for significant benefits such as a 30% federal tax credit and participation in NJ’s Solar Renewable Energy Certificates (SREC) program. Combined with the energy savings that the average NJ solar home can produce… purchasers can usually double their savings if they choose to own their systems rather than lease them. More details can be found here… http://www.greensunnj.com/LandingPage_AdW_Lease

What is the difference between a system owner being a homeowner or a company (i.e. Google) and receiving the 30% tax credit? If I had enough money, I’d buy thousands of PV systems and lease them or sell the power to others as well.

Hi Christopher, while working at SolarCity, I had suspected something similar in the numbers at the beginning. But, while I worked in sales role, I had enough access to see all the details that went into SolarCity pricing along with the number of extra costs that they acquire in taking care of the customer. If you actually look closer, you’ll understand that the cost structure of SolarCity is going to be higher by the nature of the business.

They are a high service organization where employees are owners in the company, along with big company benefits along with company vehicles, base salary, good benefits, etc. The sheer amount of services provided to customers by default was always industry leading and that also carries a cost which is calculated very carefully by lawyers, banks, etc.

The long-term picture of SolarCity is really about the point that Full saturation of the market hits, when all the other smaller solar companies go belly up or sell for pennies on the dollar and SolarCity can lay off its new customer staff which likely now accounts for a 3rd to half of total costs and focus it’s efforts on service and other continuing revenue streams.

Thanks for your inside perspective — very interesting. I have a question for you, however: why should taxpayers be subsidizing all those “industry leading” perks like fat salaries and company cars? Why should all those costs be larded onto system prices that get reported to Treasury?

With SolarCity, again, you need to understand, they are a service company. Service is provided in sales, install, and post sales. Last thing you want from a Solar Company is a guy who shows up with 3 ply papers and shows you everything on a smartphone and binder. You plan for your house to basically be married to a Solar Company for 20 years. That’s not a commitment you want to take with someone who holds all your paperwork in a box.

As for Salaries

Depends on what you define as fat Salaries. 3 years ago, Salespeople consistently would be making 80-110k working 50-60 hour weeks. These days, it’s much much less than that. I’d be willing to wager average sales compensation is closer to 50-70k while still working 50-60 hour weeks with the top still in the 100s only for the 3 or 4 salespeople with a self drive verging on criminally insane working 100 hour weeks. Company cars which used to be a prius or similar are now Fiesta, Sonics, and little Toyotas.

The reason for Company cars is pretty simple. Paying salespeople to drive personal cars at 50 Cents a mile costs more than the 340-400 a month that a company car costs for the same mileage. Plus they gain the ability to depreciate the cars. That’s really simple business sense more than anything else.

I’d say a larger portion of these subsidies lately are going into expansion and service rather than bigger paychecks which yes, taxpayers had the goal in mind of expanding Solar and with this Model of utility level service it’s basically the same cost as they paid for the existing system if not less.

Plus, from a personal perspective this type of system does what we really want to happen in a free market economy as it’s creating a way for more competition in the power markets, and diversifying our nations energy portfolio in a way that’s faster, distributed, more reliable, and serviced like a necessary utility rather than an off the shelf product at Walmart.

I think the bigger thing is to find out the price people are paying for power and help them with finding a good rate for Solar power. You’ll get a lot more readers from that. If you ever want to do the experiment let me know. I’ll be happy to go through it with you and show you how to get the best price from even SolarCity.

Every single system owner, whether a single homeowner or company (e.g. US Bank, Google) are entitled to a 30% ITC. The perceived higher costs charged by SCTY were due partially to the investors being willing to pay more for the system to gain the higher tax credit, true, but a large portion of the higher costs as derived from CSI data are due to the fact that SCTY sold a much more differentiated product than ALL of the other solar installers at the time. For example, at the time no other company was providing a 20-year warranty, 20 years of monitoring, kWh production guarantees, and the high level of service described above. In a free enterprise market, those product features come with an incremental cost. That really is what’s going on here. Only recently have we seen a lot of these same products and services being added by other installers, but that has occurred over a period where overall installation costs have declined drastically, so they can now afford to include them in a system install. However, that wasn’t the case when SCTY was leading the industry in the customer-focused, all-inclusive, keep it simple strategy so of course costs were higher then. Sorry, Ms. Podelefsky’s research seems to have a bias and lack facts. As for the question about why should tax payers subsidize the higher system costs SCTY and other finance-savvy solar installers were charging, because that’s the way the rule was written. Not sure where you’re getting the high salaries from, as that was not the case at SCTY.

I just got paid $6784 working on my laptop. Since I started freelancing over this site, with a little effort I easily bring in around $45 to $85 per/h! This is the easiest and most financially rewarding job I’ve ever had. I actually started 8 months ago and this has totally changed my life. Source……. Bay87.C(om)

What happens after 20 years when the lease has been paid up? who owns the equipment then and will all the incentives go back to the homeowner then?

Solarcity and its investors such as Google are making money off the Federal subsidies and State offered rebate that encourage clean power. What a concept? Its all dependent on our government and conscientiousness. Is the American consumer just a sheep?